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Can Merkel court a cagey China?

Angela Merkel will today try to convince Chinese leaders that Europe's new budget rules have made bailout contributions a much safer bet, but Beijing will have some prickly questions of its own to raise.

When German Chancellor Angela Merkel touches down in Beijing later today, her Chinese hosts will be expecting her to bring out the begging bowl for the debt-riddled eurozone. But they’re likely to demand that she makes some tricky concessions before they agree to throw in any money.

Merkel is beginning her fifth visit to China days after scoring a major diplomatic coup by persuading eurozone countries to sign up to strict budget rules, and to commit themselves to major structural reforms which are aimed at providing a boost to growth and competitiveness for the struggling region. In talks today with Hu Jintao, the Chinese president, and Wen Jiabao, China’s prime minister, Merkel will be keen to provide an insider's account of how this new agreement will help restore confidence in the region, which has been badly dented by the lingering European debt crisis.

Merkel, of course, is keenly aware that China, the world’s second largest economy, is sitting on a massive $US3.2 trillion mountain of foreign currency reserves. She’d dearly like to persuade the Chinese to invest some of this money in the eurozone, and particularly into the eurozone’s bailout fund. But so far, the Chinese have been extremely wary. The head of the eurozone bailout fund, Klaus Regling, visited China late last year to promote the idea but came back empty-handed. Still, Merkel won’t be deterred. She’ll encourage the Chinese to invest in the bailout fund, arguing that the eurozone’s new budget rules have made the region a much safer bet.

At the same time, Merkel, who is being accompanied by 20 German business leaders, will also be urging her Chinese hosts to invest more in Germany, and to award more contracts to German companies based in China. And she’s also likely to try to encourage China to commit more resources to the International Monetary Fund, which wants to raise an extra $500 billion to help it cope with the worsening eurozone debt crisis.

But her Chinese hosts will have some prickly questions of their own to raise with Merkel – which will centre on the access that Chinese companies have to eurozone markets.

Trade relations between China and Europe have soured in recent years, as a result of Europe’s decision to impose tariffs on certain Chinese products, such as footwear, that they allege are being "dumped” in European markets. Europe has also accused China of making its goods artificially cheap by keeping its currency, the yuan, undervalued.

Chinese leaders will be even more alarmed by reports that EU markets chief Michel Barnier is working on a new proposal that would allow firms from countries such as China to tender for major European public sector contracts only if European firms are guaranteed genuine access to their markets. The proposal is also expected to include new provisions that would prevent foreign firms, particularly from China, from winning contracts by submitting "abnormally low” tenders.

China is likely to want Merkel’s assurance that she’ll use her influence to water down Barnier’s proposal. But even if the German chancellor is able to placate her Chinese hosts on this issue, she risks offending them by raising the sensitive issue of human rights in China. Recently, Chinese security forces have cracked down heavily on dissidents in Tibet in the wake of civil unrest, while several Chinese civil rights activists have been handed long prison sentences in recent weeks after being convicted of subversion.

Desperate as she is for China’s billions, Merkel won’t be able to skirt this issue.

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